Wednesday, November 14, 2012

The markets are going to go into meltdown soon, so expect stocks to lose
20 percent of their value, Marc Faber, author of the Gloom, Boom and
Doom report told CNBC on Tuesday.

“I don’t think markets are going down because of Greece, I don’t think markets are going down because of the ‘fiscal cliff’ — because there won’t be a ‘fiscal cliff,’ ” Faber told CNBC’s “Squawk Box.”
“The market is going down because corporate profits will begin to
disappoint, the global economy will hardly grow next year or even
contract, and that is the reason why stocks, from the highs of September
of 1,470 on the S&P, will drop at least 20 percent, in my view.”

They're worried about the "fiscal cliff," which is when tax cuts expire and spending cuts are set to go into effect at the end of the year.

Fearing
an increase in capital gains and dividend taxes, many of the rich are
unloading stocks, businesses and homes before the end of the year.

Wealth
advisors say that with capital-gains taxes potentially going to 25
percent from 15 percent, and other possible increases in the dividend
tax, estate tax and other taxes, many clients are selling now to save
millions in taxes.

“Under
almost any scenario, it makes sense to take the gains this year,” said
Gregory Curtis, chairman and managing director of Greycourt & Co.
“Clients aren’t selling willy nilly. But if they can and they have a
huge gain, they’re selling now.”

If
the Bush-era tax cuts expire, taxes on capital gains would revert back
to its previous rate of 20 percent from its current 15 percent. Another
5 percent may be added from health-care levies and changes in itemized
deductions, bringing the rate to 25 percent for many high earners. (more)

Dividend-paying
utility stocks have had a heck of a run. Money has been flowing into
this sector for over two years – utilities have even outperformed the
S&P 500. Record-low interest rates have made these safe, high-yield
stocks a great alternative for investors chasing income... After all,
Treasurys and money market funds are earning negative returns (after inflation).

But conditions are falling into place for a major trend reversal. In fact, we could see utility stocks significantly underperform the S&P 500 Index in the years ahead. Let me explain...

Utility companies provide power, water, and
natural gas. They have important assets, but grow really slowly. That's
because local governments limit their ability to raise prices. In
exchange for the high regulations, however, utilities get to dominate
their markets. They generate huge cash flow, which is typically used to pay big dividends to their investors.

That
safe, stable income has helped the big utility fund (XLU) outperform
the S&P 500 by five percentage points (including dividends) in the
last two years. That doesn't sound like a wide margin. But it's significant when comparing safe-income-oriented asset classes.

However, I believe this trend is about to reverse.

President Obama based his reelection campaign on raising taxes
on the wealthy. He's also been adamant about letting the Bush-era tax
cuts expire on January 1, 2013. One of those cuts includes the rate
charged on dividends.

Today, the tax rate
on dividend income is 15%. If this expires, the tax rate on dividends
would jump to 39.6%. That would significantly reduce the rate of return
on dividend-paying stocks like utilities.

Democrats and
Republicans may come to terms on this issue. They may agree to raise
taxes on dividends only slightly. But utility stocks are still a "sell"
here...

My colleague Dr. David Eifrig, editor of Retirement
Millionaire, recently told DailyWealth readers that the tax hike won't
affect most S&P 500 companies. I agree that the stocks in this index
should perform well overall going forward. But we're talking about a
potential 25% tax hike on dividends. We've never seen anything like this
before. And utility stocks are particularly vulnerable because
investors own them solely for yield.

These companies are also incredibly overvalued.
According to Russ Koesterich, global chief strategist for investment
giant BlackRock, utilities historically trade at a 25% discount to the
S&P 500. Today, they are trading at a 15% premium. That's based on
the S&P 500 trading at 14 times earnings and the utility sector trading at 16 times earnings.

If
you are a value investor, or student of investment legend Jeremy
Grantham, you'll recall that all asset classes eventually revert to
their fair value
in time. In other words, we could see a massive pullback in utility
stocks if they go back to their long-run average – trading at a discount
to the S&P 500.

In fact, we are already seeing the early
stages of this trend. Even before Wednesday's huge pullback, the utility
sector (XLU) crashed through its 200-day moving average
(DMA). This is a widely used technical indicator to gauge the general
long-term trend of an asset. Since XLU broke below its 200-DMA, it means
shares will likely continue heading lower.

To
be clear, I am not saying to sell all dividend stocks. I recently gave
you two examples (here and here) of dividend payers with huge growth
potential. As I said earlier, utility stocks grow slowly. Most investors
buy these stocks solely because of their yield.

If you don't
own shares of utility stocks, I don't recommend buying on this pullback.
If you do own shares, I recommend lightening up your positions heading
into January 1. If the tax break on dividends expires, we could see an even bigger pullback in this overvalued sector.

Continued weakness in
the grain complex is helping to keep pressure on the Continuous
Commodity Index or CCI. There looks to be a change of ownership occuring
in this complex with hedge funds bailing out of a sizeable long
position and commercial interests obtaining long side hedge coverage.

We have this selling occurring not
only in the grains, but also in the metals and the energy sector and
some of the softs. This is providing some headwinds to the precious
metals complex even with the equity market bulls trying their best to
jam prices higher and prevent a further technically related sell off
from deepening.

Armstrong
World Industries, Inc. engages in the design, manufacture, and sale of
flooring products and ceiling systems in the Americas, Europe, and the
Pacific Rim. The company's Building Products segment produces suspended
mineral fibers, soft fibers, and metal ceiling systems for use in
commercial, institutional, and residential settings. This segment sells
its commercial ceiling materials and accessories to ceiling system
contractors and resale distributors. Armstrong World Industries'
Resilient Flooring segment produces vinyl sheets, vinyl tiles, and
linoleum flooring, as well as sources and sells laminate flooring
products, adhesives, installation and maintenance materials, and
accessories for homes, and commercial and institutional buildings. The
company's Wood Flooring segment offers pre-finished solid and engineered
wood floors, and related accessories for use in new residential
construction and renovation with various commercial applications in
stores, restaurants, and offices. This segment sells its products to
independent wholesale flooring distributors and large home centers.
Armstrong World Industries' Cabinets segment offers kitchen and bathroom
cabinetry, and related products used in the residential new
construction and renovation markets. This segment also provides design,
fabrication, and installation services to single and multi-family
homebuilders, remodelers, and consumers.

To analyze Armstrong's stock for potential trading opportunities, please
take a look at the 1-year chart of AWI (Armstrong World Industries,
Inc.) below with my added notations:

If you look at AWI you will see that the $50 level (navy) was a major
resistance from March up until just last month. After moving sideways
during most of that time, the stock finally broke through that $50
resistance at the end of October. Last week AWI stalled at $55 and has
now pulled back down to the $50 level.

News from Europe took a turn for the worse last week, and the stock market
responded by declining. While the sell-off started after traders saw
the election results, this move was probably a reaction to the fact that
the global economy
is weakening and there is no quick fix to the problems. Market prices
may need to correct for slower growth, and we may have seen the start of
a significant downtrend.

Traders React to a Worsening Economic Situation

This week, traders learned:

-- The Congressional Budget Office (CBO) believes that U.S. GDP
will decline 0.5% next year and unemployment could rise to 9.1% if the
fiscal cliff is not avoided. If the cliff is avoided, CBO forecasts
growth of 1.7%. When the best case is slow growth and the worst case is a
recession, traders have little to cheer.

--
Germany's Economy Ministry warned of a "noticeably weaker economic
dynamic." The Organization for Economic Cooperation and Development had
previously forecast a recession for Germany starting this year.

-- France is already in a recession, according to the country's central bank. This threatens to make Germany's potential recession deeper since France is a major consumer of German exports.

-- Greece might run out of money to pay its bills within a week and is in a depression with its economy contracting about 25% during the past five years. (more)

The "Chart of the Day" is Cooper Tire & Rubber Company (CTB), which
showed up on Monday's Barchart "52-Week High." Cooper Tire on Monday
posted a new 16-month high of $24.43 and closed +2.92%. TrendSpotter has
been long since Nov 5 at $22.88. In recent news on the stock, Morgan
Stanley on Nov 7 reiterated its Overweight rating on Cooper Tire and
raised its target to $30 from $22. Cooper Tire on Nov 2 reported Q3 EPS
at $1.17, far above the consensus of $0.86. Cooper Tire, with a market
cap of $1.5 billion, specializes in the manufacture and marketing of
automotive products.